Manufacturing Accounting

General Manufacturing Accounting

The goal of manufacturing accounting is to value products you manufacture based on the value of their inputs, including raw materials and labor. A separate work in progress inventory account is usually used to account for the value of products which are being manufactured, but which are not finished and therefore could not be sold.

When raw material is issued during a production run, the value of your raw material inventory is reduced, and the value work in progress inventory is increased:

DR WIP Inventory
  CR Raw Material Inventory

Similarly, when direct labor and other expenses such as energy are used in the manufacturing process, the value of work in progress inventory is increased against these expenses:

DR WIP Inventory
  CR Manufacturing Expenses

When the product is finished, its value is transferred from work in progress inventory to finished goods inventory:

DR Finished Goods Inventory
  CR WIP Inventory

Later, the manufacturing expenses are offset against your actual expenses such as payroll or bills from utilities:

DR Manufacturing Expenses
  CR Salaries
  CR Utilities

And your actual expenses and bills are accounted simply as

DR Salaries
  CR Salaries Payables
DR Utilities
  CR Accounts Payables

Netting these transactions together, the effect is

DR WIP Inventory
  CR Salaries Payables
  CR Accounts Payables

However, the manufacturing expenses account serves as a convenient internal tracking mechanism.

Accounting for Reverse Assembly

When a manufactured product is reverse assembled into its parts, the finished product is used as the raw material and its parts are obtained as the output products. The guiding principle here is that the parts must be stocked at a conservative valuation equal to how they could be obtained from other sources, not at the value implied by the finished product plus any cost of disassembling it. This is because the finished product usually has a higher value than the sum of its raw materials, and it is not appropriate to re-stock the parts based on the value of the finished product when the original raw materials could be available for less. (Otherwise, scrap metal would be worth more if it came from a luxury car than from a toaster oven.)

Thus, when the finished product is issued to be reverse-assembled, their value is removed from inventory, and the parts are added to work in progress (WIP) inventory using the following costs:

• If there is a standard cost available for the part, then it is added to WIP inventory at the standard cost.
• Otherwise, it is added to WIP inventory at the lowest cost which could be purchased from a supplier.
• If none of these costs are available, then the system will receive it at a zero cost and log a warning message.

After all the parts are added to the WIP inventory, the difference between the value of all the parts and the original finished product would be charged off to a special "Manufacturing Cost Variance" account configured for your company.

During the reverse assembly process, if any costs are incurred, they are immediately written off to "Manufacturing Cost Variance" as well instead of being added to "WIP Inventory" and carried on the balance sheet. Insert non-formatted text here

Managing Fixed Assets < Section Pages > A Step-By-Step Manufacturing Example -- A Configurable Product Run